The “May” and “Shall” Conundrum under the Insolvency and Bankruptcy Code

The enactment of the Insolvency and Bankruptcy Code, 2016 (Code) was one of the most significant legal reforms in India in the recent past, aimed at solving the burgeoning problem of non-performing assets and bringing the insolvency law in tune with global standards. The Code incorporated recommendations made by various committees and went through a rigorous review process. However the entire Code has not yet been brought into force and the notification of the provisions of the Code is being done in a phased manner.

The Code confers both the debtor and the creditor with the power to trigger a corporate insolvency resolution process (CIRP). However, the manner in which the two parties can trigger the CIRP differs. Interestingly, the Code creates two broad categories of creditors – financial and operational. Financial creditors are those whose relationship with the entity is by way of a pure financial contract (such as a loan or a debt security), and on the other hand operational creditors are those whose liability owed by the entity arises from a transaction on operations. Note that the Code has also been found to envisage another class of creditors who are neither financial nor operational, and they do not have the power to trigger CIRP. I have discussed this issue of the so called “third class” of creditors earlier on this blog.

Whilst sections 7 and 9 of the Code provide for the filing of an application by the financial and operational creditors respectively, section 10 provides for an application by the corporate applicant. The Code specifies certain documentation and conditions which must be met in each case before an entity can be sent for resolution.

A very important aspect which requires some consideration here is whether the National Company Law Tribunal (NCLT) is bound to accept an application if the applicant has fulfilled all the conditions laid down in the provision. The legislative scheme strongly suggests that the adjudicator does have some amount of ‘discretion’, except in cases where the applicant is a financial creditor. This point can be appreciated in a better manner by looking at the relevant provisions which have been extracted below.

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or….”

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order— (a) admit the application, if it is complete; or

(b) reject the application, if it is incomplete….”

[Emphasis supplied]

It can be noticed that the legislature in its wisdom has used the expression ‘may’ in section 7(5) and the word ‘shall’ has been employed in sections 9 and 10. The use of the word ‘may’ implies that discretion is given to the NCLT. The legislature is incapable of contemplating all the possible circumstances which may arise. Sometimes when a difficult situation arises it may demand such directions being made as would pragmatically meet the needs of the situation

For the aforesaid, one can well argue that the use of different words in the same Code is not without a reason and therefore the adjudicator will have some discretion when it comes to an application under section 7 as opposed to applications under sections 9 and 10. The use of the word ‘may’ in section 7 and ‘shall’ in sections 9 and 10 strengthen the inferences that these words have been used in their primary sense. This argument is also in line with the literary rule of interpretation. The intention of the legislature must be found in the words used by the legislature itself. Needless to say that such discretion ought to be exercised sparingly in a judicious manner and only after taking into consideration all the facts and circumstances of each case. Further, an order admitting an insolvency application is not a routine order as it leads to serious consequences to the debtor and other stakeholders. Such an order deserves application of judicial mind and one cannot have a mechanical approach while deciding the fate of such applications.

At this juncture it will be worthwhile to allude to the NCLT Hyderabad’s decision in the case of Anrak Aluminium Limited v. State Bank of India. The corporate debtor could not commence its operations for lack of raw materials and the assets of the company were lying unproductive for years. In the absence of a viable option, Anrak Aluminium had filed an application seeking CIRP under section 10 of the Code. The NCLT, considering the public money already invested by the banks and contribution of promoters towards the project which had a potential employment generation of more than 1000 employees directly and indirectly, advised the applicant to approach the government agencies. It rejected the application in the interest of the stakeholders.

In my view, the adjudicator had overreached its authority and violated the provision by advising the applicant to explore other viable options. The provision does not confer upon the NCLT such freedom and therefore it ought to have admitted the application. However, the NCLT would not have necessarily breached its authority if it were to reject an application filed under section 7 for a ‘compelling reason’ (such as public interest). One cannot lose sight of the fact that there are often cases where there are compelling reasons to reject an application even though all the express conditions have been met.

The Supreme Court’s decision in the case of M/s Innovative Industries Ltd. v ICICI Bank, which is the locus classicus for section 7 of the Code, throws some light on the problem before us. While upholding the decision of the National Company Law Appellate Tribunal (NCLAT), the Supreme Court observed that if the NCLT has ascertained the default and is satisfied that the application is complete, the application must be admitted. It is necessary to bear in mind that this issue was not canvassed before the Supreme Court. Besides, there are numerous decisions of the NCLAT where the tribunal has expressly refused to take into consideration other factors while deciding on applications filed under section 7.

This issue appears to be settled, as the word “may” is assumed to be used in a mandatory manner as opposed to a discretionary manner. However the above discussed argument is not entirely without merit and in the absence of an authoritative pronouncement it justifies judicial scrutiny for a determinative decision.

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